Keep in mind that the lifetime of your USB stick will be shorter. A USB stick is not a hard drive. But if you install Ubuntu in a USB stick you will not feel any difference!
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DrKenobiJan 22 '11 at 13:00

EDIT: if you plan on still being able to use some of the flash drive for storage, then format the first partition as FAT because the FAT partition on a flash drive is the only one recognized by Windows as far as I know.